Luke Gromen: This Is How Hyperinflation Begins

Gromen argues the Fed faces an inflation tradeoff: rate hikes may slow inflation for two to six months but become more inflationary 12 to 14 months later as debt refinances at higher rates. He says the highly financialized economy is also rate-sensitive, so tightening could slow activity and weaken tax receipts rather than reliably reduce inflation.

Gromen says interest, entitlement, and veterans-affairs obligations had reached 105% of receipts through the fiscal third quarter, with those outlays growing nearly 8% against 4% receipt growth. He argues that entitlement cuts could further weaken consumer spending if boomers save more for their own care, compounding the challenge posed by the debt burden.

Gromen cites an analysis in which 52 of 53 countries that reached 130% debt-to-GDP over 220 years defaulted, mostly through high inflation, and notes that the U.S. has reached that level. In his view, negative real rates are needed to sustain U.S. and Western debt, meaning U.S. bonds may repay nominally without delivering positive real returns.

Gromen argues that rising term premiums reflect inflation expectations or supply and demand rather than U.S. default risk, and says foreign borrowers may sell Treasuries to obtain dollars and defend their currencies. In one scenario, a DXY of 99–102 could prompt $1 trillion in annual Treasury sales, raising the effective U.S. deficit from $2.1 trillion to $3.1 trillion and putting upward pressure on long-term rates.

Gromen expects long-term Treasury yields to rise during the next recession, possibly after a brief initial decline, because investors are heavily positioned in Treasuries and may sell during downturns. He also says hedge funds’ Treasury share has risen to 7%—twice its level five years ago—with leveraged basis trades that could be unwound through Treasury sales if volatility rises.

Gromen warns that AI could reduce well-paid healthcare-administration employment, putting mortgages, car loans, and credit cards held by affected workers under pressure. He also argues that AI productivity gains could weaken employment tax receipts while investment competes with government borrowing: he cites an $11 trillion AI capex estimate for 2024–2029, including $5 trillion in borrowing, alongside annual U.S. deficits above $2 trillion.